Fed review: Balanced and optimistic
|- The Federal Reserve maintained its policy rate target, administered rates and balance sheet policy all unchanged in the January meeting, as widely expected.
- Powell struck a balanced but positive tone, and avoided firm forward guidance on possible timing of the next rate move. Economic outlook has improved in early 2026, which has both reduced downside risks to labour market and upside risks to inflation.
- Market reaction remained very muted. The next rate cut is fully priced in by July.
We see risks tilted towards faster easing and expect cuts in March and June.
The Fed kicked off 2026 policy meetings with a balanced, yet positive tone. The updated statement saw economic activity expanding at a ‘solid’ pace (prev. ‘moderate’) and said that the unemployment rate has ‘shown some signs of stabilization’ (instead of ‘edged up through September’). It also completely removed the sentence stating that ‘downside risks to employment rose in recent months’.
Outgoing governor Miran and Fed chair candidate Waller dissented in favour of a 25bp cut, but Powell clarified that there was ‘broad support’ for holding rates steady. He added that for now, no one’s base case entails the next move being a rate hike.
Powell repeated the statement’s optimistic message, saying that the labour market ‘may be stabilizing’ and that ‘incoming data shows clear improvement in outlook for growth’. To balance the tone, he also emphasized that upside risks to inflation have eased and appeared more confident that tariff-driven inflation would subside over the course of 2026. Powell refrained from commenting on the recent USD weakness, and whether the move could fuel additional inflation. He also avoided a question regarding the very latest uptick in markets’ breakeven inflation expectations.
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